Question

R. E. Lee recently took his company public through an initial public offering. He is expanding the business quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 40 percent for the first three years and then he expects it to slow down to a constant 15 percent. The most recent dividend (D₀) was $0.75. Based on the most recent returns, his company's beta is approximately 1.5. The risk-free rate is 8 percent and the market risk premium is 6 percent. If the company has 2 million shares outstanding, what is the market value of R.E. Lee?

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 8 + 1.5 * (6)

Expected return% = 17

	Required rate=	17.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0.75	40.00%	1.05		1.05	1.17	0.8974
2	1.05	40.00%	1.47		1.47	1.3689	1.07385
3	1.47	40.00%	2.058	118.335	120.393	1.601613	75.16984
	Long term growth rate (given)=	15.00%			Value of Stock =	Sum of discounted value =	77.14
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

Value = price*shares = 77.14*2000000

=

154280000